April 8 (Bloomberg) -- China’s local governments may have
more than 20 trillion yuan ($3.2 trillion) of debt, former
Finance Minister Xiang Huaicheng said, almost double the figure
given in a 2011 report by the National Audit Office.

The combined debt of China’s central governments and the
nation’s provinces and cities may currently be more than 30
trillion yuan, Xiang, who served as finance minister from 1998
to 2003, said at the Boao Forum for Asia. Local governments had
10.7 trillion yuan of debt at the end of 2010, the auditor said
in its report.

“It seems the central government’s debt level is quite
transparent, while local government debt isn’t, and therefore
it’s not easy to get a clear picture,” Xiang said April 6. He
added that since he retired, he’s no longer “within the
system” and that his comments on government debt are based on
his own personal estimates.

China has sought to curtail borrowing by local governments
because of concerns that banks will be saddled with bad debts.
The nation’s central bank estimated in 2011 that local
governments, which are barred from directly taking bank loans or
selling debt, had set up more than 10,000 financing arms to fund
the construction of roads, bridges and sewage plants.

“We recognize some progress has been made by the central
authorities to keep that level of indebtedness and the local
public finance under better watch,” International Monetary Fund
Managing Director Christine Lagarde said at the Boao Forum
yesterday. “To make sure the borrowing by local authorities is
actually kept under control and not diverted through various
agencies or off-balance sheet structures, is critical to
actually keep public finances under control.”

Strengthen Controls

Wen Jiabao said on March 5 in his final work report to the
National People’s Congress as premier that China will strengthen
management over the debt of provinces and municipalities. Loans
to China’s local government financing vehicles, or LGFVs,
currently total about 9.3 trillion yuan, an increase of 2
percent in two years, the China Securities Journal reported on
March 8, citing bank regulator Shang Fulin.

The public doesn’t need to be alarmed by the level of
government debt because as a ratio of China’s gross domestic
product it is “not particularly high” and because the
borrowings are mostly domestic, Xiang said at the forum. There’s
also no sign of lending going to “very, very bad” projects or
work with “very, very low efficiency,” Xiang said.

He also applauded efforts by new Finance Minister Lou Jiwei
in overseeing a study on local government debt levels, saying
the review shows China is taking the issue seriously.

“Right now our situation is very good,” Fred Hu, founder
of the private equity firm Primavera Capital and former Greater
China chairman at Goldman Sachs Group Inc., said at the Boao
Forum. “But what about in the coming five years, 10 years, 20
years?” he said, adding that if the issue of local government
borrowing isn’t addressed China could face a debt crisis.